Australia’s economy is on a roll – Have Australian Interest Rates bottomed?

March News

March 14 2017

Australia’s economy is on a roll – Have Australian Interest Rates bottomed?

The Reserve Bank of Australia left the benchmark rate unchanged on Tuesday 7th March 2017, maintaining it at a record low of 1.5 %, however, “governor Philip Lowe issued a markedly more upbeat assessment of the global economy, and rising business investment – long regarded as the “missing link” in the economy’s transition away from the resources boom – as well as noting that house prices were rising “briskly” in some regions.”

The financial markets have more than doubled the probability of an RBA rate hike later this year from a 20% chance only a week earlier.
Whilst all the current news is very upbeat for the Australian economy, I still remain unconvinced that the RBA will increase rates this year and it may well need to consider another reduction if business investment doesn’t continue to increase and economic output retraces some of the recent stellar gains.

Apart from this, there is still a massive amount of geopolitical risk and global policy uncertainty to contend with, along with the size of Australian household debt that needs to be serviced and three upcoming elections in Europe!
The other issue the RBA has to contend with is the continuing strength of the AUD and raising rates at this stage would only make this worse whilst dampening consumer spending and employment.

On the flipside of this, since earlier last year I had also thought that US bond yields will continue to rise and that is now becoming more and more apparent. I actually thought that the US Fed would have been more proactive in normalising rates but this was only a delay to the end of cheap money for now.

Since the Australian banks are quite dependant on wholesale international markets for some of their capital requirements, this increased cost of capital will see rate increases continue to filter through to retail borrowers in Australia.
This is one of the main reasons we have been advising clients to fix their interest rates during 2016 so as to provide some peace of mind for the portion of their overall borrowings that was likely to remain as part of their long term debt portfolio.

We continue to see ongoing reports of a property bubble which is mainly put forward by international commentators who, I believe, are looking at this in a purely quantitative sense.
One can use an array of different indices and metrics to show that properties in certain parts of Australia are expensive and that has been the case for decades.

It is important to note that Australians are now the 5th wealthiest in terms of average wealth per person behind Monaco, Lichtenstein, Luxemburg and Switzerland, and over the past decade alone, total wealth has risen 85% compared to 30% in the US and 28% in the UK.
It is far easier for Expats to see that this is all relative and that many other Countries have cities that make Australian property values seem very cheap on a relative nominal basis.

I think it is important to understand that Australia is a country of immense size and it has many different property markets which react in totally different ways at the same point in time. All one needs to do is speak to any property owner in Sydney as opposed to their counterpart living in Perth and this vast dichotomy will be clearly borne out.
Notwithstanding this, it is always important to remember to buy quality assets in sought after locations that are built for the owner occupier market and try to ignore the lure of small 1 & 2 bedroom investment grade apartments offering higher rental yields in large towers often in and around CBD locations.

It is becoming increasingly more difficult to find these properties with the ability to still buy them at a realistic value so research and relationships become even more important in being able to build a quality asset portfolio over time.
The other important macro factor that we should increasingly pay attention to is where the strategic development of large scale infrastructure projects may have a significant impact on property outcomes over the medium term.
One such catchment area is Caloundra and the Sunshine Coast in South East Queensland. I will continue this topic in subsequent news articles.
Wishing you a happy and fruitful investing outcome in 2017 and beyond.

Australia’s economy on a roll, thanks to state governments

Property developers are building more houses, farmers are exporting more food and foreigners are paying more visits. Brendon Thorne

Gold rush in the late 19th century so enriched Charters Towers, an outback town in the state of Queensland, that it opened its own stock exchange. Trading ceased long ago.

But the grand building still stands, its barrel-vaulted portico supported by eight slim pillars. Over a century later, Queensland is reeling from the demise of another mining boom.

“There was a perception it would go on forever,” says Liz Schmidt, mayor of Charters Towers. But unlike so many other booms, this one has not ended in a national bust. Australia’s multi-pillared economy is still standing.

Given the violence of the commodity cycle, Australia’s resilience is remarkable. At its height, mining investment accounted for 9 per cent of GDP. As the economy scrambled to meet China’s demand for iron ore and coal, Australia’s terms of trade spiked.

Household debt likely to stand in the way of rate hikes

by Cameron Kusher

06 March 2017Official interest rates are at historic lows and it seems unlikely that they are going to be increasing in the near future. Furthermore, don’t expect interest rates to return to historic average levels due to record high levels of household debt.The Reserve Bank (RBA) Governor Phil Lowe suggested last week that if it wasn’t for the strength of the housing market, and a fear of inflating it further, official interest rates would be lower. It was an interesting comment from an RBA Governor, especially when you read what the RBA’s function is: The (RBA) is Australia’s central bank and derives its functions and powers from the Reserve Bank Act 1959. Its duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. It does this by setting the cash rate to meet an agreed medium-term inflation target, working to maintain a strong financial system and efficient payments system, and issuing the nation’s banknotes.

Inflation is currently well below the RBAs target range and the country is not at full-employment which would indicate the RBA should be considering interest rate cuts. Clearly the economic prosperity and welfare of Australian people (linked to dwelling value growth) is a key reason why they are not cutting interest rates.

When you look at some of the key data, it seems like it could still be a long time before the RBA starts lifting interest rates again.

Official interest rates

The new British owners of economic forecasting firm BIS Shrapnel are happy for their local economists to make big calls including the view that the Organisation for Economic Co-operation and Development has got it wrong on the Australian housing market.

Adrian Cooper, who is chief executive of Oxford Economics, says his firm has a history of allowing its economists to make big calls on turning points in economies or markets.

“The important thing is to have the depth of analysis and understanding that underpins such calls,” he says.
Also, Oxford Economics makes sure that its house view is globally consistent.

Robert Mellor, the managing director of BIS Shrapnel, which has been renamed BIS OE following the sale of 51 per cent of the equity to Oxford Economics, says he disagrees with the recent OECD analysis of Australia’s housing market.

Board members kept the benchmark at 1.5 per cent, a record low the Reserve Bank said in a statement. The decision was expected.

Speculation is growing that a shift in global inflation expectations, a resurgent US economy, and the end to a near-decade long non-mining business investment strike will prompt the Reserve Bank to unwind its recession-level monetary policy settings.

In his post-meeting statement, Reserve Bank governor Philip Lowe noted that US interest rates are “expected to increase further” and that other major central banks are no longer delivering extra monetary policy easing.

BRICs to keep on delivering: Jim O’Neill

Jim O’Neill, the British economist famous for accurately predicting 16 years ago that the rise of the “BRIC” emerging economies would power the world, says Australia is in a “wonderful” position to ride the new wave of growth in China, India and Indonesia.

However, the former Goldman Sachs chief economist said the high sharemarket capitalisation of Australia’s big banks compared with global peers was a potential sign of dangers “lurking” in expensive local house prices

“It seems to be, notwithstanding the housing threat, Australia is in a really good position,” Mr O’Neill said in an interview.

Jim O’Neill, who is in Sydney as keynote speaker at the Australian Financial Review Business Summit. Louie Douvis

“One of the reasons I’m less worried about Trump is that the US doesn’t dominate global trade in the way it once did,” Mr O’Neill said. “Of course, what Trump does on policy is going to be hugely important but it’s not the only show in town.”

Mr O’Neill has maintained his faith in several of the BRIC (Brazil, Russia, India and China) economies since coining the acronym in 2001, especially India and China, which has sucked in huge amounts of Australia’s commodity exports. read more…

There’s No Housing Bubble in Australia, Heads of Big Banks Say

by Emily Cadman

March 8, 2017, 1:55 PM

Soaring home prices in Australia’s biggest cities don’t necessarily mean the country is in the grip of a housing bubble, according to the heads of the nation’s biggest banks.Why Australia’s Property Market Is Booming

“I would draw the distinction between a speculative bubble in prices and prices beyond what fundamentals would justify,” Westpac’s Brian Hartzer told the committee in Canberra Wednesday. A bubble isn’t occurring in Sydney or Melbourne, where house prices have risen the most, he said.

“There are increasing risks, but I still believe the answer is no,” National Australia Bank’s Andrew Thorburn said when asked if houses in Sydney and Melbourne are overpriced.

Commonwealth Bank, the nation’s largest mortgage lender, is “lending at levels we are comfortable with” across Australia, Chief Executive Officer Ian Narev told the committee when he testified Tuesday.read more …

Australia, New Zealand Luxury Homes on Top With 11% Gain

by Pooja Thakur Mahrotri

March 10, 2017, 9:40 AM GMT+8

Luxury home prices in Australia and New Zealand jumped 11 percent last year to be the best-performing region in the world, Knight Frank’s Prime International Residential Index showed. Asia ranked second in high-end housing gains as individual wealth rose. Meanwhile, Russia and the Middle East posted declines in prime home values, joining three other regions that went backward. Read more …

Australia Is One of the World’s Fastest-Growing Wealthy Nations

As the World’s Wealth Rises, Australia Is the Biggest Winner

Low taxes, pretty beaches lure millionaires to Australia

by Jeanette Rodrigues

March 9, 2017They’re all going to the land Down Under.

Australia is luring increasing numbers of global millionaires, helping make it one of the fastest growing wealthy nations in the world, according to reports from New World Wealth. The influx may be because of Australia’s superior healthcare system and lower inheritance taxes, its ideal location to do business with Asia, as well as proximity to the South Pacific Islands that allow retired yacht owners to sail away. And, of course, the nation’s pristine beaches.

Over the past decade, total wealth held in Australia has risen by 85 percent compared to 30 percent in the U.S. and 28 percent in the U.K., aided by the fact that Australia has gone 25 years without a recession.
As a result, the average Australian is now significantly wealthier than the average American or Briton. The country may attract even more migrants as racial and religious tensions rise in Europe, according to the reports.

At the end of 2016 individuals held about $192 trillion of wealth worldwide, or about 11 times the U.S. gross domestic product, with 13.6 million millionaires holding $69 trillion of this. There were 522,000 multi-millionaires, having net assets of $10 million or more. “Wealth” refers to the net assets of a person, including property, cash, equity, business interests and minus any liabilities.

Bond yields shoot up as odds narrow for RBA rate hike

Market pricing of an RBA rate rise is well ahead of economist expectations. Rick Rycroft.

Australian bond yields have shot up to 15-month highs as odds of a rate rise this year by the Reserve Bank of Australia narrow sharply and global markets scramble to position for a faster than expected pace of US monetary policy tightening.

The chance of a RBA rate hike before the end of the year rocketed to 44 per cent on Thursday, according to financial market pricing, sharply higher than the 20 per cent seen at the start of this week.

Shifting expectations towards a 2017 rate hike – which would be the Reserve Bank’s first increase since 2010 – follows a marked improvement in global economic data, rising yield curves, and the biggest positive income shock from commodity exports in more than six years.

Meanwhile, the yield on the 10-year Commonwealth bond hit 2.929 per cent on Thursday morning, its highest since late 2015, while the 2-year yield climbed to 1.927 per cent, just below recent highs from December. Read more…

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Wise Guru provides Australian property investment advice to expats and locals living in Singapore and in the region. We provide a tailored concierge service for each of our clients from identifying the right property, analysing and managing your cash flows, arranging finance and ensuring the correct structure, and working with a team of professional settlement agents and property managers to ensure your property is tenanted, saving you time and money.

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